John Taylor and Taylor Rules in Monetary Policy: A Panel Discussion

[00:00:00][Music] My name is Faviland. It's a pleasure to be here and uh thank you very much uh to the organizers. Um I actually traveled in from Germany, from Europe um yesterday actually from Munich and there are lots of good news in Germany. We have a new chancellor. The world has a new pope who hails from America and we all here have John Taylor. So I'm very grateful to the organizers that I can participate in the celebration in honor of John Taylor and I feel very honored to moderate this morning's first panel on John Taylor and Taylor rules and policy at the Hoover multi policy conference on finishing the job and new challenges. It's also a great honor to speak right after Condelisa arise. Uh thank you. So in a way this panel is part of both events. I mean it's a joint event and yesterday's event to honor John's pathbreaking and highly influential contributions to economics as a science and to economic policy as a science and as an art and to today's event that dives into current challenges for central banks around the world. It was an amazing conference yesterday. It gave justice to the wide range of fundamental scientific contributions by John to multic economics. the modeling of the macroeconomy, price and wage rigidities, methodological advantage advances to solve and estimate macro models with rational expectations and I may add with learning um finance and asset pricing, international monetary and fiscal policy interaction and prominently for us today rules for monetary policy and I may add fiscal policy. So those of us who are on the annual mailing list of this Swedish committee, let's make sure to get that message across to them also. But there was more yesterday as the many students and friends of John gathered and shared their views on his work and their experience with him as a human being. And in my humble view, no matter how important or unimportant we are in the eyes of society at large, what really matters is how we live our lives and how we deal with all the human beings around us. And um right at the first panel, Andrew Lean spoke about these aspects of John Taylor and he spoke about stewardship and the how to be a good steward. And it was moving to hear throughout the day what everyone shared about John in this regard. I was not able to be here due to a delay uh of my flight but I was able to follow much of it from the plane via the zoom link and so I could also testify to that. So today we start with Taylor rules and their use in policy. We have an amazing list of speakers six speakers um which leave us little room. So where do I hit the button here? Ah here. So here are the six names just so I don't forget anyone. Um if we start off so we'll have only I think 10 minutes per person. Right. We start off with John Williams a student of John in one of the world's most influential central bankers today as FOMC member and head of the New York Fed implementing US multi policy. Then Agugustine Karstens, general manager of the BIS, both send videos. And then here with us in person, we have Christopher Waller, currently uh on the Federal Reserve Board, the board of governors, and Loretta Maester and Charles Blosser, both previously serving as Federal Reserve Bank presidents and on the FOMC and Kevin Worsh, formerly also board of on the board of governors.

[00:04:01]From my side, I was also a student and research assistant of John uh in 1992 to 1995 actually together with John Williams and when I moved as a young economist to the board of governors in DC, Taylor rules were a hot hot issue, a hot item. So I got immediately involved and it I was of course pleased that what I learned at Stanford could be put to use uh right away and was involved in preparing material for the policy meetings um of the governors using Taylor rules. Other people there involved and included John Williams, Andrew Leaven, Athanasius Orphanites, David Small, David Wilcox. There was the early leadership by Donald Coh, Peter Tinsley, Dale Henderson and Richard Porter among others who all worked at the institution and helped put these ideas to practice. And once the Fed started doing communication following its decisions beyond just on which uh arm Alan Greenspun was wearing his his uh uh uh materials, right, which at one point was chosen as an indicator. So they actually started using words and the framework when that was discussed how to have a verbal communication after the decision also followed the ideas of the Taylor rule that was and I could tell you some anecdotes about Ellen Greenspan and staff fed staff work on policy rules but there's no time uh so maybe some other time we're moving from the history of economic thought and economic policy to today's challenges and to set that up let me just show you one slide with Taylor rules um and the Fed and the ECB policy since 2019. You probably have discussed similar things yesterday and you can see on the left for the US and on the right for the Euro area. Isab will also be speaking later from the ECB board that a range of tailor rules gave clear signals for the need for policy tightening from 2021 onwards. The Fed is actually publishing a version of policy rules and they signaled policy easing from mid 2023 onwards and recently policies were quite in line with those prescriptions and we hope to find out recently so not in 2021 and we hope to find out more about the likely steps ahead in the future and that's exactly what we hope to hear and get insights from this panel. So without further delay, if I can say let's get started with the videos, um there will be no further introductions from my side. I've introduced everyone and we go straight uh to the videos and then one speaker after the other and then a Q&A and a final round of replies. Thank [Music] you. Hello everyone. I wish I were back on the Stanford campus with you for this wonderful occasion celebrating my mentor, advisor, and dear friend, John Taylor. I'm so glad to have the opportunity to share my experience learning from one of the great economic thinkers and scholars of our time. Now, it's worth noting that John has had not one, not two, but three fundamental concepts in monetary economics named after him. There's the Taylor principle, the Taylor curve, and of course, the Taylor rule. In addition, John has consistently emphasized the need for approaches to monetary policy that are robust to the myriad uncertainties we face. Indeed, this quest for robustness was the frame by which John identified what became known as the Taylor role.

[00:07:36]Now, I arrived at Stanford in 1989 as a budding economist. John became my adviser and hired me to be as a research assistant. And it was an extraordinary privilege to have those two most wanted positions. It was a critical and exciting time to be thinking about economic policy. Of course, that's a line that I've had occasion to repeat many times since. During that period, with the advent of inflation targeting, the practice of monetary policy was on the cusp of a revolution. At the same time, John and others were re-examining the theory and evidence behind the ways that policymakers could consistently deliver low and stable inflation in the post Brettton Woods era. My role in all of this was running multi-country model simulations for John's book, Macroeconomic Policy in a World Economy, which led the way for John's great work, Discretion Versus Policy Rules and Practice. this brilliantly synthesized theory and experience to yield clear prescriptions for good policy. And that experience informed my career in so many ways. What I learned then, and something I've carried with me for over three decades, is the importance of connecting theory and practice. The theories that shape good policy are derived from the experiences of the past, and they create the lessons for the future. It's a principle that I return to constantly and it's something I impart to others.

[00:08:59]The power of great mentorship in our world of economics especially is an equally important lesson from my time with John. This conference is a testament to how his thinking and teaching has led to pivotal transformations in central bank policym and to informing generations of economists. So, John, congratulations on a truly revolutionary career and thank you. It is a true pleasure to be part of this special occasion honoring my good friend and esteemed colleague, John Taylor. John's academic contributions to central banking and international finance are monumental.

[00:09:39]But what stands out just as much to me is his valuable career in public service and his dedication to upholding sound principles in policym. His impact extends far beyond academia. He has been a guiding force in shaping policy frameworks that have stood the test of time. Today I want to share some personal stories that highlight just how impactful John has been in all these areas. I've have had the privilege of knowing John for many years and our paths have crossed at some of the most important moments in global economic policy. We first worked closely together when we were both under secretaries at our respective finance ministries. John in the United States and me in Mexico in the early 2000s. That period was marked by critical challenges in global finance. I was fortunate to witness firsthand John's ability to navigate these challenges with clarity and conviction. One of the first major issues we worked on was sovereign debt restructuring for emerging markets. At this time, emerging markets had faced two decades of recurring debt challenges, typically resulting from macroeconomic imbalances. The first was in Mexico in 1982. This was followed by a wave of crisis across Latin America. In the late 90s, the East Asian financial crisis underscored the vulnerability of even seemingly higherforming emerging markets to southern capital flow reversals.

[00:11:26]In 2001, Argentine experienced a dramatic default. The need for a formal framework for sovereign debt restructuring was widely acknowledged, but identifying the right mechanism had proved to be a challenge. The IMF had a proposal known as the sovereign debt restructuring mechanism or SDRM.

[00:11:51]This had merit and could have provided a more orderly and predictable process for managing sovereign defaults than what existed before. But both United States and Mexico had concerns about its rigidity and and its implications for national sovereignity. Rather than simply opposing the idea, John played an instrumental role in pushing for a better alternative. enhancing collective action clauses in sovereign bond contracts. Unlike the the SDRM which centralized decision making under international mechanism, collective action clauses allow bond holders and sovereigns to negotiate restructuring terms directly. As a result, they foster market-based solutions while preserving discipline. Mexico was one of the first countries to implement the enhanced collective action clauses in our sovereign bonds, setting an important precedent that has since been widely adopted. Beyond his work at the US Treasury, John's academic contributions have also had a profound real world influence on the conduct of monetary policy, including in emerging markets.

[00:13:15]His tailor rule became a cornerstone of modern monetary economics, giving central banks a clear rule-based framework for responding to inflation and output fluctuations.

[00:13:29]Although best known for its application to the analysis of US monetary policy, in my view, the Taylor rule may have been also very influential and valuable in emerging markets where it was a powerful tool for central banks seek seeking to build credibility and enhance the effectiveness of their monetary policies.

[00:13:55]The Taylor rule and inflation targeting both emerged in the early 1990s. Before then, many emerging market central banks faced macroeconomic imbalances and often operated under policy frameworks that frequently lacked consistency. The traditional nominal anchor for many of these economies at the time was a fixed or highly managed nominal exchange rate. But this was proving to be increasingly unviable in a world of globalized trade and finance. Inflation targeting held the promise of delivering something better.

[00:14:37]It sought to establish a firm nominal anchor for the economy, creating the necessary conditions to enable greater exchange rate flexibility and providing a convincing rational for central bank autonomy.

[00:14:53]However, central banks that adopted inflation targeting, particularly in countries with a history of high inflation, still face the challenge of establishing their credibility. Why should businesses, households, and financial markets believe their commitment to keep inflation low? In this context, the Taylor rule was a powerful tool. The Taylor rule provided a systematic approach to assess the appropriateness of interest rate setting based on inflation and economic activity. This helped central banks enhance transparency, reduce uncertainty and strengthen market confidence.

[00:15:37]All this contributed to the successful implementation of inflation targeting regimes and helped reduce inflation from high levels and tanker inflation expectations. Nevertheless, at times central banks in emerging markets, including Bank of Mexico, had to adapt their monetary policy frameworks to overcome challenges posed by volatile capital flows and currency fluctuations.

[00:16:04]Most central banks in these juris in these jurisdictions adopted flexible exchange rate regimes. But the depth and functioning of foreign exchange markets could not always be assured particularly during crisis. We therefore established frameworks that allowed the exchange rate to act as a shock absorber and source of market discipline most of the time. However, we still retained the option to intervene when markets were particularly thin, especially when sharp exchange rate depreciation threatened our inflation target and the anchoring of inflation expectations. The great financial crisis, the zero lower bound and unconventional monetary policy in advanced economies were further game changers. The effects of US monetary policy became even more pronounced. This enhanced the role of exchange rates and capital flows for monetary policym in emerging market economies. For many emerging markets, including Mexico, this meant facing a flood of capital inflows when rates were low and capital outflows when tightening cycles began. In this context, these jurisdictions had to balance the need for domestic policy autonomy with the reality of global financial integration. We adapted our tailor rule benchmark to account for these global dynamics by introducing the US shadow rate to better reflect the monetary policy reaction function. John's work gave us a strong foundation and we built upon it in ways that reflect the realities of emerging markets. That's a testament to the strength and flexibility of his ideas. The Taylor rule was also a valuable addition to the analytical toolkit of international institutions like the BIS. It provided us with a convenient metric to assess and summarize the conduct and stance of monetary policy across our members. Even today, more than 30 years after John first proposed it, the Taylor rule remains the starting point for much of our analysis of real world monetary policy. For example, in one of our most recent quarterly reviews published just a few months ago, my colleagues Bor Boris Hoffman, Christina Mana, and Benoa Mojon use modified Taylor rules to show that central banks in advanced economies typically respond much more strongly to inflationary pressures driven by changes in aggregate demand than they do when inflation results from changes in aggregate supply. Needless to say, this topic is particularly relevant in the aftermath of the postcoid inflation surge. The work was innovative and featured some cuttingedge econometrics and yet because it was couched in terms of a tailor rule, its conclusions were easily understood and absorbed by policy makers. In a sense, the Taylor rule provided the common language to make technical vocabulary understandable for those in the trenches of dayto-day policy making. John, I want to personally thank you not just for your intellectual contributions, but for your friendship and your unwavering commitment to fostering cooperation.

[00:19:52]Your impact on monetary policy and international finance is immeasurable and I along with many others have benefited greatly from your wisdom. You have made the difference that will endure for generations. It's an honor to celebrate you today and I look forward to many more conversations and collaborations in the years to come.

[00:20:18][Music] Thank you. We actually also gained some time uh according to my counting taking two presentations in the intro. We're next on to Chris Waller and uh then Loretta and Charles and Kevin Walsh. If we stick to about 10 minutes per speaker, maybe we can get more time for Q&A and for the final round of the four um people here on the panel. So Chris, up to you.

[00:20:48]Well, first of all, anybody watching who thinks I'm going to talk about monetary policy today, you're going to be sadly disappointed. So, thank you, Vulker, and thank you for the opportunity to speak to you today. John Taylor is deservedly well known for his work on monetary policy rules, the best known of which bear his name. But in the early 1980s, John was part of a broader discussion about rules versus discretion in the setting of monetary policy.

[00:21:16]Now the traditional argument for discretionary monetary policy was that any policy choice that a rule would recommend could be replicated by discretion but not vice versa. So discretion allowed more flexibility than a rule and thus was the dominant strategy for setting monetary policy. I think Ed Nelson talked about this last night.

[00:21:40]Then in 1977, Fidden Kettin and Ed Prescott published their paper rules rather than discretion, the inconsistency of optimal plans, which argued that policy promises made today may not be carried out in the future if there are advantages to reneging on those promises. Renegade made by discretionary policy makers, they argued, is much easier than reneggging on a policy rule, which is a way to commit to future actions.

[00:22:10]Now, KD and Prescott provided a simple and appealing model at the end of their paper. The model had an incentive for the central bank to reneg on its promise to keep inflation low since doing so would expand the economy and lower unemployment. But if rational agents knew of this incentive, they would not find the promise of low inflation credible and would therefore raise their expectations for future inflation.

[00:22:36]the central bank would then have to validate those expectations with higher inflation to avoid a recession. So in the end the economy ends up in a high inflation equilibrium with no gains of higher output or lower unemployment. Now KDin and Prescott then showed that if on the other hand the central bank could commit to following a rule to set policy then it could not reneg on its promises. As a result, inflation would stay low while yielding the same outcomes for output and employment. In this case, rules beat discretion. This was pathbreaking research and it came to influence both the theory and practice of central banking. It was also part of the basis for KD and Prescott's Nobel Prize in economics in 2004. But commitment to most things in life is easier said than done.

[00:23:33]Even rules can be abandoned if it is optimal to do so. In the absence of commitment, can the central bank do anything to enhance the credibility of its promise to keep inflation low? In 1983, Robert Barrow and David Gordon used the Kid Prescott example to study reputation building by the central bank. The basic idea is to establish a reputation for fulfilling your promises.

[00:24:01]But what promises can be made in a discretionary world that the public would find credible? Now, what they showed is promising the low inflation outcome wasn't credible. However, the central bank could promise an inflation rate that was between the low and the high inflation equilibrium.

[00:24:21]If private agents expected this intermediate inflation rate, then the gains from reneging would be reduced just enough to dissuade the central bank from breaking its promise. Consequently, promises to deliver this intermediate inflation rate were credible, and society was better off than they would be in the high inflation world, showing that credibility really mattered in a world in which commitment was not feasible.

[00:24:48]I now introduced John Taylor and his work into this story which coincided with the beginning of my own research career. In 1983, having read the Barrow and Gordon paper, I started working on reputation building strategies as part of my PhD dissertation research. In the process, I was struck by the thought that the building of credibility in reputation hinges on the person setting monetary policy at the time. If that person leaves, does the central bank have to start all over to rebuild its credibility? At the time, I had in mind Paul Vulker, whose personal credibility seemed so crucial in the Federal Reserve's campaign to vanquish high inflation. Relying on the credibility of individual policymakers seemed like a weak foundation for sustaining the credibility of policy promises.

[00:25:41]That is when I went back and I read John Taylor's discussion of the Barrow and Gordon paper in the journal of monetary economics. John applauded the analytical contribution that Barrow and Gordon as well as Kllin and Prescott had made, but he was skeptical about the practical applicability of their story. In his critique, John said the following sentence. In other well-recoognized time inconsistency situations, society seems to have found ways to institute the optimal cooperative policy. As a 24year-old, as I read that sentence, I thought, "So, how does society build credibility into the institution instead of relying on the credibility of an individual?"

[00:26:24]That one sentence that John wrote in 1983 set me off on a 20-year journey studying central bank design. So where did it lead me? Around that time, Ken Rogoff published his paper on what he referred to as conservative central bankers. In his terminology, a conservative central banker was someone who disliked inflation more than the rest of society.

[00:26:50]Rogoff showed that a conservative central banker would choose a lower rate of inflation than the average citizen would want, but at the cost of higher instability of output and employment. Nevertheless, this trade-off improved social well-being, but there was one catch to this solution. There had to be safeguards to guarantee that the conservative central banker could not be fired for this policy decision. ensuring that these promises to control inflation were in fact credible. In short, the central bank had to be independent and protected from the threats to its independence. This type of institutional design issue was one that I was interested in researching. So, up until Rogoff's work, the underlying assumption had been that the central bank was trying to maximize social welfare and that its preferences were aligned with those of society.

[00:27:44]think of it as just a standard representative age in economy. But as I read Rogoff's work, it suggested that society consisted of people who had a variety of views about inflation, meaning they would also have different views on the tradeoff between inflation and output stability. Consequently, members of society may have different views on how conservative the central banker should be. But where are these views coming from? Where are these preferences coming from? So I tried to indogenize the heterogeneity and preferences. I had the idea that all individuals had the same fundamental preferences for inflation and output stability. But they varied if they worked in different sectors of the economy. In one sector, wages and employment were determined in a standard competitive fashion. In the other sector, wages were determined by wage contracts and employment was demand determined.

[00:28:42]Thus, when a negative shot hit the economy, the cont wage contract workers suffered a bigger reduction in employment because wages couldn't adjust. Whereas in the competitive sector, wages would adjust to soften the blow of unemployment, implying that if the wage contract sector got to choose the conservative central banker, they would want a more doubbish central banker who would accept slightly higher inflation in return for greater employment stability.

[00:29:11]The flexible wage workers wanted the opposite. They were more hawkish on inflation because they didn't bear the same employment volatility. So the punchline was that if political parties formed around these workers in different sectors, then they would choose and install central bankers with different policy preferences if they won the election. Now, it was around that time that I read Alberto Alcina's paper on partisan business cycles.

[00:29:38]In that paper, he assumed there were different political parties, each having different preferences about inflation and employment. One party was more concerned with price stability and less concerned with output stability. Just like my other work, monetary policy and inflation outcomes were determined by the party that won the national election. As power changed hands after an election, monetary policy would differ from expected policy depending on who won the election. These election surprises would create volatility in monetary policy and thus inflation in output. In other words, elections would lead to, in Aliceina's words, partisan business cycles. Now, in Alice's model, monetary policy was fully accountable to the electorate, which is desirable, but it came at the cost of greater economic instability.

[00:30:32]Now this was a brilliant paper but again it raised a serious question for me. Why would society choose full electoral accountability and maximum volatility in monetary policy? Economists usually think there are trade-offs on the margin such that corner solutions like that aren't optimal. It seemed to me that there could be a welfare improving institutional design for the central bank. And I looked at the Federal Reserve Board of Governor structure and I felt that electoral electoral accountability could be achieved through the appointment process. But economic instability could be reduced by having a central a monetary policy board composed of current and past appointees who set policy according to a a majority rule. This thinking led me to taking a variant of Alice's model and studying how a policy board could change his results.

[00:31:27]I assume that board members were appointed by the winning party of an of a of an election to serve for multiple periods. This appointment process provided accountability to the electorate via the nomination confirmation process to ensure that economic stability would be improved. I assumed that these members serve staggered and long relative to the election cycle terms in office.

[00:31:53]Furthermore, as in Rogoff's model, board members could not be removed from office. This feature of the model captured the idea that the central bank board would be independent. Now, my research showed that having an independent policy board set monetary policy, social well-being was improved relative to Alice's results. Accountabil accountability to the electorate could be achieved through the nomination confirmation process and economic stability was enhanced by having a group of individuals set policy who could not be removed from office. The structure is the one that we have in place today at the Federal Reserve. I would argue it has stood the test of time and I hope that it continues to be in place for years to come.

[00:32:39]So to conclude, I have come full circle in my professional life. From first reading that sentence that John wrote in 1983 to researching central bank independence and central bank boards for 20 years and then becoming a central bank board member, which led me here today so that I can finally thank John for sending me on a wonderful journey that he had no idea he launched me on.

[00:33:05]Thank you.

[00:33:08]morning. So, I never had the opportunity to take a course with John Taylor, but I've learned so much by reading your papers and hearing you discuss other people's papers that I really feel like I'm one of your students. So, I want to thank you for all of those contributions and um I'm really honored to be able to participate in today's conference. So every macro model incorporates some type of tailor rule um relating the central bank's policy rate to a set of economic conditions and the tailor principle which holds that the nominal policy rate should be uh increased more than one for one in response to a sustained rise in inflation is now accepted as appropriate monetary policy. Um, now the economics profession has not determined that there's a single policy rule that's optimal across a variety of economic models and in a variety of economic circumstances. Different rules can imply different paths for the monetary policy interest rate. And I wouldn't want to argue that a central bank should set policy simply by following the prescriptions from a single rule. And we heard yesterday that really that's a straw man that that people have put up.

[00:34:21]I think a more general significant idea that I take from John Taylor's body of work is that a consistent systematic approach to setting monetary policy can make the policy more effective of achieve at achieving its economic goals.

[00:34:35]So while judgment must be brought to bear in policym I believe it should be disciplined judgment and that and informed by rules informed by models rather than discretionary opinion that's not necessarily consistent with the underlying structure of the economy. Now policy rules are useful in internal policy del del del del del del del del del del del del del del del del del del del del deliberations as a way to discipline judgment and rules can also help uh policy makers explain their decisions to the public and you know doing doing a better job of explaining and conveying the policy reaction function improves transparency accountability and credibility all of which support monetary policy independence. Um, and now of course we have limited time today. So I'm going to focus my uh remarks on first internal deliberations and then on external communications. So policy rules are used at the Fed um both internally and externally. The board of governors semianual monetary policy report began incorporating prescriptions from a set of monetary policy rules in July 2017.

[00:35:47]And except for the June 2020 and February 2022 reports, rules have appeared in every report since then. The board stats baseline forecast and tealbook part A which helps to coordinate FOMC policy deliberations incorporates a policy rule and in the teal book um there's a section on monetary policy strategies that show policy prescriptions from several rules.

[00:36:15]Of course, various policy makers have used rules to help explain their own policy views. Some of them are in this room. Um, yet I think rules could be used more consistently in materials pro provided to the FOMC prior to meetings to help guide the internal deliberations. So when I was a policy maker at the um Federal Reserve Bank of Cleveland, I found that looking at the prescriptions from a set of simple robust policy rules across different economic forecasts really helped me formulate my own policy views. Um and actually in 2016 um we started publishing uh the current readings from a set of uh policy rules and also a tool that allows um any researcher or um market economist or any interested party to customize the rules um to generate alternative policy paths um depending on what your forecast own forecast is. So intuition can actually lead you astray. Um the economy really encompasses a vast array of interactions and general equilibrium dynamics between various actors and sectors. And I find that economic models and policy rules discipline one's thinking about the relationship between incoming data forecasts risk and policy decisions. I can't keep a general equilibrium model in my head and you need to have the models written down to actually help you think through things. um they they really help to ensure that judgment which has to be brought to bear in policym is consistent with how the economy actually works. Um, and when the Fed's policy stance was different from what the rule suggested, I really had to carefully considered where, you know, whether there were factors or alternative model assumptions that could support that deviation. Um, and see that was very helpful to me as I was thinking about policy. In addition, seeing the variation in prescriptions from different rules also helped me assess what the salient risks were to the outlook. So I didn't find the fact that there wasn't a single rule that everyone accepted as being necessarily a negative. It actually helped us actually have other rules that work robustly. Um I did use simple policy rules to help me construct my submission to the summary of economic rejections.

[00:38:36]Um and I also found the rules helpful um in understanding the SEP results across participants. So if you look at the September 2018 uh transcript which is now public, I discussed the type of policy rule that could fit the SE projections and compared that rule to the policy rule in the staff's tealbook uh forecast. And it turned out that the derived FOMC participants rule was a little less inertial than the tealbook baseline rule. But the main difference was that the SEP rule put little weight on the unemployment gap and a high weight on the inflation gap. And given that the Tealbook's baseline rule was a very good good description of the past behavior of the FOMC, I found this to be a cautionary tale. It meant that the committee was planning to react differently to incoming data than it had in the past. And in particular, it was reacting much less to the tightness in the labor market as summarized by the undershoot of employment from its estimate of the natural rate of employment or use star than it had in the past. Now, I believe that framing an internal policy discussion like this at the four SAP meetings would help participants have a better understanding of what their SAP submissions imply about the committee's reaction function.

[00:40:00]And I think the committee could go a step further and actually ask FOMC participants to submit two sets of rejections. One based on their current view of appropriate policy um as as as is currently done and one based on a benchmark policy rule. And in this exercise, I think it's less important about what the particular rule um is chosen um than the fact that it would force some consistency across the forecast. committee committee participants will get a better sense of the assumptions each colleague was making about the underlying dynamic economic dynamics and constructing their forecast. In addition, if the prescriptions from a set of rules applied to different forecasts were were given more emphasis in internal deliberations, I think it would help illuminate for participants the type of variation one could expect in the policy path if the economy were to evolve differently than the modal forecast. I think you know we we've learned that putting too much weight on a particular forecast can lead to policy mistakes and looking at various scenarios and the variation policy prescriptions across those scenarios helps to mitigate that risk and if you look at the teal book it includes alternative scenarios. I think it's particularly useful to analyze these alternatives when the level of uncertainty is high and there are several plausible scenarios that are nearly equally likely.

[00:41:25]Arguably during the pandemic, the FOMC put too much weight on the scenario in which inflation driven by supply side shocks would prove to be transitory rather than the alternative scenario in which demand side accommodation was also an important contributor to persistent high inflation. Had FOMC meeting deliberations routinely included a discussion comparing proposed policy paths with prescriptions from rules. The discussion would have highlighted that policy was increasingly deviating from the tailor principle. Now, of course, it's not clear that having that insight would have changed Fed policy decisions, but I also think we can't rule out that it might have resulted in the FOMC moving rates up sooner. policy tightening may have been able to be more gradual than it ended up having to be which would have proved less risk pro you know pose less risk of financial instability of the kind we saw in March 2023. So let me now turn to external communications. Um, as everyone probably in this room knows, the benefits of clear communication and systematic policym derive from the fact that households, businesses, and investors make economic and financial decisions uh based on their expectations of the future, including the future path of monetary policy.

[00:42:49]Now, when monetary policy makers set policy in a systematic way and clearly communicate this, their actions become more predictable and that predictability enhances the transmission of monetary policy to longerterm interest rates.

[00:43:04]Lower policy uncertainty reduces term premia and better aligns longerterm interest rates to the expected path of short-term rates. The public gets a better sense of how monetary policy is likely to change as economic conditions evolve. And with such knowledge, households and firms can plan better.

[00:43:22]They can make better saving, borrowing, investment, and employment decisions.

[00:43:28]In addition, when the public understands the usual strategy for setting policy, it's going to understand the policymakers reasons for deviating from that approach in extreme circumstances such as the global financial crisis or the pandemic. And those deviations are going to be more successful because of that understanding. So really instead of limiting options being consistent in communicating the rationale for decisions can expand policy options. Of course, the communications challenge for monetary policy makers is to give the public a good sense of the usual reaction function, how how policy is likely to respond conditional on how the economy evolves without implying that policy is precommitted to a particular policy path regardless of how the economy evolves. Um, and I don't think it would be that large a leap to start using the prescriptions from the policy rules published in the Fed's monetary policy report as a reference point in policy communications. I think they'd provide a good illustration of conditionality and better link up the changes in economic conditions to changes in policy. When actual policy differs from the prescriptions from the rules, the policymakers could explain why. Now, in an uncertain environment, more communication is better than less.

[00:44:52]But it often seems that in uncertain times, policy makers want to explain less because the uncertainty around the outlook and risk make them fear being locked in or being perceived as as making promises they may not want to keep. So, at the Fed, the trend has been towards shorter communications. My first meeting as as Cleveland Fed President was in June 2014, and I looked at the statement.

[00:45:16]There were 759 words in the FOMC statement. My last meeting on the FOMC um as Fed president was June 2024 and by then there were only 295 words in the statement. So there's a nice research paper by McMan and Naylor.

[00:45:32]Um and they really indicate that shorter does not necessarily mean more easily understood by regular people. um you know other people like the media um some in this room fed you know commentators they're going to fill in the void and communications with their own interpretations and while they're very good at what they do sometimes that interpretation will differ from what policy makers intended so I actually think it's better for policy makers to take control of the narrative and I think if policy communications routinely included a discussion of a consistent set of data that inform the outlook, the policymakaker's outlook and risks around the outlook, some alternative ways the economy might evolve and how the policy maker plans to balance the risk to the dual mandate goals, at least in the Fed.

[00:46:25]The public would have a better sense of what data dependent means. Um, and those these kind of communications don't have to be technical. In fact, they're better if they're not. um instead they would strive to convey complex ideas in an accessible manner without jargon and the recent research by McMan and Naylor suggests that can be done. Finally, we live in a time of rising public skepticism about experts um and declining public trust in institutions. Probably the number one way an institution can build trust is to be excellent at what it does. um that is to reach the goals um that it's been charged to achieve and that means having a very well-qualified staff making decisions informed by the best information and analysis available.

[00:47:16]But regardless of how good the policymaking foundation is, we have to recognize that a high degree of uncertainty often clouds the outlook and increases the number of plausible scenarios that could play out, raising the risk that even the best formulated decisions don't produce the intended results. So a central bank needs to be constantly building its credibility with the public. And I think it can do so by explaining its policy goals, taking a consistent approach to policy decisions rather than a discretionary one, communicating in a transparent way so that the general public understands the rationale for its decisions and holding itself accountable, taking ownership of any deficiencies and making improvements to its policy strategy. In an uncertain world, economic conditions can evolve in an unexpected way that requires a change in policy. And if the public understands the reason for the change, it's going to be less likely to interpret the change as evidence that the past policy stance was an error or that the institution is succumbing to outside influences. Instead, the public would understand that if there is a material change in the economy, it's appropriate for monetary policy to evolve, too. So, that's a really simple concept, but I do think it's worthwhile uh worthwhile one to really explain to the public. Um because as much as we'd like it to be true, telling the public, trust me, is not good monetary policy communication.

[00:48:47]Thank you.

[00:48:50]Good morning everyone. It's really a pleasure to be with you again today. I'm delighted to have the opportunity to participate in this conference and the celebration of John Taylor's contribution to economics. As we've heard off and on since yesterday, John's academic contributions run deep and and I can't say that I can add to that because so much has been covered. They're even deeper than I may have thought they were just a few weeks ago.

[00:49:22]So we all owe a great deal of appreciation and respect for John and his thoughtfulness and his willingness to engage both in the theory and in the practice of making policy and sometimes that's a hard gap to span. So like many of you I want to thank John for your contributions your wisdom and your friendship. Thank you.

[00:49:50]So in my brief remarks today, I'm going to reflect on what might be described as some internal conflicts in the way monetary policy has um been followed and also uh how it has contributed to confusion and perhaps a less desirable outcomes than might have otherwise been achieved.

[00:50:16]I also think you'll find that my comments and Chris's comments and Loretta's comments, there's some really common threads to what what we're thinking about, but perhaps looking at them from a little different perspective. So, I hope that will be useful. Um now as we all know since the work of Lucas Kdan Prescott and of course John Taylor most of all and many others we have learned the benefits of carrying out policies based on a commitment to a specific goal and the systematic and predictable actions necessary to achieve them. And those outcomes typically are preferable to to policies um under discretion. Um now to be sure these issues that we've been talking about um the central bank is aware of them obviously it understands these issues and but the credibility or the the importance is understanding credibility and commitment. Um, the Fed has worked hard to improve transparency and to signal commitments to various goals. Notably, after almost two decades of discussion, the Fed finally adopted an explicit inflation target in 2012. Now, articulating and achieving a uh articulating an achievable goal is an important step, but it's only the first step.

[00:51:53]The important the important followup as you've been hearing is making that commitment credible. This is the difficulty that we face and it's not an easy one and it will never be perfect.

[00:52:11]But without that credibility, the outcome suggested by our models and theories may be unachievable and may even be uh counterproductive.

[00:52:23]Thus, I think that an important role for the central bankers and their associated governments is to promote ways to make monetary policy makers more credible. Now, there are various ways of approaching that. Um, one is to enhance credibility and monetary policy commitments by delivering by Senator Biden delivering price stability over long periods of time that spans episodes of turmoil, changes in administrations um, and various shocks. Obviously the Bundesbach, the Swiss National Bank are the classic examples of central banks that earn credibility through such a reputational dating process.

[00:53:16]Such reputation building takes time, takes a little luck and perseverance, but it also can be fragile and policy makers can easily damage their own reputations or their institutions reputation through discretionary actions of various kinds or failures of various kinds.

[00:53:37]I think the inflation spike in 21 20 21 22 was a step back for the Fed's reputation of building efforts. Other way other ways to increase credibility can come from institutional factors that constrain or limit the discretionary capabilities of the monetary authorities.

[00:54:02]Now those such limitations are also important for securing central bank independence. The independence of the monetary authority is incredibly important. But it simply cannot be sustained in a democracy without clearly achievable goals and constraints on its powers and authorities. There must be limitations. Such institutional constraints can make the monetary authority less discretionary as well and more accountable. For example, narrow and achievable mandates can help focus monetary policy and reduce the temptations to venture into other more politically sensitive areas.

[00:54:51]I've argued for some time now that mission trip and the expanding expectations for monetary policy can drag the Fed into highly political arenas that undermine its independence and weaken its ability to deliver on its price stability mandate. In addition, other types of things that can help this is restricting the Fed to holding an all treasuries portfolio that restricts the Fred from uh and limits the Fed's ability to engage in credit policies and allocation through the purchase and sale of private sector securities.

[00:55:34]Interestingly enough, the Fed KY of 1951 was an intent to relieve the pressure on the Fed to expand or contract its balance sheet to accommodate the Treasury's debt management objectives. That was successful and a huge step towards Fed independence at the time.

[00:55:58]Unfortunately, it's my view that the Fed's new ample reserve regime and interest on reserve combined to make an inr run around that protection that was built into the 51 accords.

[00:56:14]um and did that by allowing the Fed to expand or contract its balance sheet u uh in uh advant it balance sheet without altering its interest rate policy.

[00:56:31]What this does from an institutional standpoint is opens the door for fiscal pressures to manipulate the size and composition of the Fed's balance sheet for political objectives.

[00:56:45]This breakdown in the barriers between monetary and fiscal policy drags the Fed ever more deeply into political issues and thus a threat to its independence as the Congress or the or administration seeks seeks to use the balance sheet for its own political aims. As important as independence is, the source of uh constraints I'm suggesting here would also contribute to the Fed's credibility and commitment to its stated goals by reducing the range of discretion available to it. Another way to increase the credibility of the central bank is the adoption of a rules like uh system that we might describe uh as a Taylor rule of some kind. uh and it describes how policy will react to specific economic events. Now such systematic rules are generally thought of as as I said tailor type rules and are best described as reaction functions that describe settings based on the actual or forecasted values of the data. Now adoption of such reaction functions helps strengthen the commitment and transparency of policy and provide provides a for a forum in its own right of forward guidance. Now FOMC transcripts clearly demonstrate that many members if not most or all understand the importance of credibility and commitment in what they do. But in another sense, the Fed and many other central banks still take a very what I would describe as a highly discretionary approach to policy. Policy is often described as being data dependent. A phrase that I like very much and views myself. But without describing how the data affects policy, that is saying more about the reaction function. such statement as a standalone statement is pretty vacuous. It really doesn't say anything about what the Fed will do. It's just said that it's going it'll do something whatever it feels like doing. And so, in a sense, it's a little misleading to think that is a commitment to to anything. Uh, and so I don't feel like that I feel like that's more of a sense of discretion really than it is of commitment. From my perspective, in my time at the Fed, um, I think it's noteworthy that despite the policy discussions, information that's in the tier book sometimes or in the monetary policy report, I'll come back to that in a minute.

[00:59:34]um that despite those discussions, it's hard to find any reference to rules or systematic policy that might bolster credibility in the actual policy statements issued after each meeting. In those in those statements, I don't think I've ever seen the word rule or systematic or how a rule might influence or or did influence that policy decision. Nor do you find such a reference in the quarterly summary of economic projections.

[01:00:13]It would be wonderful. I think uh Chris uh alluded to this and others have as well that that's an opportunity I think for the Fed to integrate its perspective on rules directly into the SCP. Now there is this usual there is a usual reference for some time in the semiannual monetary monetary pause report on the implications of some basic uh rule like guidepost. But from my perspective and and uh others may differ, I've always felt that that discussion was more of an afterthought than it was an integral discussion, an integral part of the policym process. And of course, I say that in general generality, but for individuals, that may not be true. So I don't want to I don't want to overplay that.

[01:01:08]Um, as I mentioned, the Fed seems to acknowledge the benefits of commitment and credible policies conducted in a systematic manner. The challenge the Fed confronts is that retains a desire to be discretionary. And when the Fed says on one page it's committed to doing X and the next time they say, well, if the data change or if the world changes, we'll change our policy.

[01:01:37]they're actually undoing in my view the commitment they were just trying to make. And so I think that tension between those two approaches is very difficult. And I think the way to think about it is to think that um particularly in the case of forward guidance that the Fed used to talk about back in the 90s and Greenspan and other times they talk about forward guidance in terms of sort of the balance of risks and that wasn't a commitment to anything but it was sort of telling you a little bit about how the Fed evaluated the risk. And as we all know during the great financial crisis the policy rate approach um approach is lower bound. The Fed took the view that forward guidance could be used as a distinct and independent policy to shape expectations. The idea for us was that by promising to keep rates lower for longer than otherwise than otherwise would occur, whatever that was.

[01:02:45]um monetary policy could potentially provide a form of stimulus. This approach critically dependent on the credibility and commitment of the Fed's promise and the understanding of the public as to what the actual policy entails. Now, this strategy, however, is undermined and can prove counterproductive if the Fed's promise is not credible or well understood.

[01:03:15]Indeed, the Fed's announcement in August 2011 uh kind of in and my um review of history you might say in Lorettes and the the that August meeting 2011 u was widely interpreted by some or widely interpreted by many many people is that what was this commitment? They were confused.

[01:03:43]did the keeping rates low for two years was not a signal that the economy was going to be better. It wasn't interpreted positively by a lot of people. In fact, the intention the the interpretation of many people was that the the economy would be in dire straits for the next two years. That had the opposite effect that would have the opposite effect of what the Fed was intending. So the credibility and commitment of its statements really hang uh such promises uh uh by a by a thread and it's very hard um yeah just one more paragraph um the strategy that many of us talked about yesterday in terms of the Taylor rule and Loretta was talking about and I have talked about it about making uh a Taylor rule or a rule as probably a guidepost where there's a there's the ability to deviate or to be discretionary under certain circumstances. Um I think that's probably the most viable approach. But here too you have to be careful. You have to be careful about assigning under what conditions can the Fed deviate and why.

[01:05:06]If it becomes common practice for the Fed to choose let's say a different approach than the than the rule says then what happens then you have discretion and then the Fed has to wonder all right when I am following the rule or I do want to do something that's credible how does the public know they won't oh I'm calling calling us hard it's discretion we're going to change we're not going to do that practice actually undermines the credibility they're trying to build. Uh so in ending uh monetary modern monetary theory tells us that effective policy is enhanced in important ways by the credibility and commitment of policy makers to behave in a transparent and systematic manner.

[01:06:02]There are a number of ways for the Fed or any central bank to enhance its credibility, including institutional arrangements that impose limits or constraints on objectives and ranges of and discretionary powers, the adoption of operating regimes that incorporate more discipline and systematic decisions. The Fed has come a long way in some dimensions on the road towards transparency and credibility, but there's still opportunity for improvement, and reducing its reliance on discretion can only enhance their position.

[01:06:37]The lesson might be for the Fed to spend less time and effort seeking or justifying the expansion of their powers and the range of options for intervening in the economy and more time arguing for limitations on themselves that might support independence and strengthen their ability to make credible commitments. Thank you. Thank you, Chaz.

[01:07:01]So, we're right up to our last speaker, Kevin Worsh. Uh thank you very much.

[01:07:07]It's uh it's an honor to be here. It's an honor to share this panel with uh public servants uh past and present. Uh strong, committed, beautiful servants.

[01:07:16]Um as was the practice many years ago. I used to follow cleanup after Charlie and Loretta. And they would go on and on. So I have to say this very briefly. They would come they would come to these meetings very well prepared with their speeches and I would come with a bit of a note card. So, we're keeping that tradition on. And uh it's also an honor to be here moderated if not by a by a public servant, someone whose parents named him after a great one. So, thank you, Vulker. Um uh let me do a few things just to borrow on on what my colleague said. First, I'll do a little bit of trip down memory lane like Chris did uh in honor to John Taylor. I'll then give three learnings from from the Taylor rule that I think has some some broad applicability. Uh then I'll talk for a moment about what's missing from the Taylor rule understandably because the innovations for better and worse about policy sense.

[01:08:12]Um first I was first exposed the Taylor rule on this ground if not in this building more than 30 years ago and John's leadership really makes us all his intellectual heirs. I see other professors of mine like John Kogan here.

[01:08:26]So this brings me back to when I was about 19 years old. Um, I looked at the Taylor Rule last night on the way out and I did have a bit of a trip down memory lane and when I looked at it with sort of fresh eyes, it had a simplicity, an elegance, almost a clinical quality to it that is in stark contrast to some of the volume of commentary we get from the modern central bank. And that's certainly attractive. When I remember seeing it for the first time 30 years ago, it was a period closer to the great moderation. It was understandable that we would say we can reduce our knowledge to this rule. And it was wonderful to have a simple and robust rule at the time 30 years ago too. I think the tradition in which John envisioned this came from a period around this institution when Milton was still with us that they grew and as a result I grew somewhat skeptical of big blackbox models of complicated multivariate regressions and so the simplicity had a huge appeal. I remember debating or listening to the debate I was a child about whether the rule was descriptive of what policymakers do do or whether it should be normative what policymakers should do. I also remember some 30 years ago fights that were had on these grounds about what are the right coefficients, what's the shape of the Phillips curve, how flat is it, or should we discard it alto together. So for me, this was a formative time to be here with the great minds in the profession uh like John and so many others. Uh second, what are the legacy and learnings um that John imparted through the rule that I think broadly has some application to the conduct of policy? But like Chris Waller, I will avoid the current policy conjuncture as best I can. Um, one is we've learned, I think quite assuredly in the last generation or so, that there is no cruel choice. That the two objectives embedded in John's rule of low inflation and uh and unemployment are not at war with each other. They aren't enemies, they're friends. And so the idea that we can push one up to move the other hopefully has been beaten out of uh the current practice of policy. Current policy makers can judge that better than I. Um second I think we should understand that the rule is aspirational. The rule is we in economics profession want to reduce our knowledge of the economy to a rule. And so John's rule is important because that's who we want to be.

[01:11:04]Many of us came to economics because we were studying physics or math and we decided it was a little too hard. So we ended up in economics. And so while the rule is powerful, I think even John would acknowledge it's not equals MC². Um the difficulty about economics unlike physics is our atoms keep learning and they change their minds.

[01:11:27]And the world, the economy acts fundamentally differently today than it did even a decade before. But the aspiration is an important one. Tends to be in economics that most of the results we come up with where we have to recognize that they're somewhat overdetermined. You we have to resist this idea of scientism. We have an exaggerated sense of how everything works in the economy and so we can reduce things perfectly to a rule. But John's aspiration is the right one. and it's uh the subject of inquiry that his successors need to say how can we make the rule any rule even better. So it strikes me that uh it's important to aspire to it and like my other panelists said the economy cannot thrive consistent with its full objectives with a fully discretionary central bank and central bankers acting as overlords.

[01:12:22]what monetary policy is, if not a pure science yet, is it's a craft. That doesn't means it it that doesn't mean it's arts and crafts. It's a craft. We need to take the science seriously and ask about what we can do to pursue it more. We central bankers, especially people that are in the arena like Chris, must understand that central bankers are thinkers. They're not profits. That's a second learning.

[01:12:47]What's a third and final learning? And this one I think you know is easily forgotten. Inflation is a choice. The world central bankers get to choose the inflation rate. When you look at John's rule, there's no victimhood in the rule.

[01:13:05]The central bank gets to establish the policy rate and drive an inflation objective. Central banks in his rule are not victims. There's no anguish of central banking. Those days are behind us.

[01:13:19]uh inflation isn't caused by pandemics and autocrats around the world. The inflation level is set by the world's central bankers. And without going too far a field, in my view, it's principally set by spending and printing. I think the other thing I must say I acknowledged when I looked at the rule last night on the flight out here is what's absent from from John's rule. Um, understandably so. There's no balance sheet in John's rule. There's no mention of quantitative easing. Of course, we created that some years after the rule found its way into our textbooks. And in some broad sense, I think we should acknowledge now what we acknowledge at its creation. The Federal Reserve created a second monetary policy instrument, a second instrument that has an effect on inflation.

[01:14:10]Um, if the central bank were to quiet its printing press, then we could go back to John's rule and we could say, what does the rule tell us? But with a very active, large, and often growing balance sheet, we have two policy instruments, imperfect substitutes for each other, working sometimes at cross purposes, sometimes working together. But if the printing press could be quieted, we could have lower policy rates because a $7 trillion balance sheet is having an effect on these inflation objectives. Um there are many benefits of a small balance sheet, including lower rates, but better economic outcomes is probably the most important among them. What's the second and final thing that's I won't say missing from the rule but is implicit in the rule and I think every one of my colleagues on the panel referenced it. I call it trust. Chris called it from the literature reputation building. Uh Loretta called it credibility. So did Charlie. The rule works if the central bank is credible. The rule works if the central bank has demonstrated its ability to achieve its outcomes. To the extent the central bank has made errors in the conduct of policy, the rule doesn't really work because then they have to compensate. I know it would be nice if we could say bygones are bygones, but households and businesses don't believe that past errors have an effect on dead weight losses the economy and can restrict what a modern central bank has to do. The precondition for stable prices is confidence by households and businesses that central banks will deliver stable prices. And the best way to give them that confidence is to have achieved it.

[01:16:03]It is up to the central bank to ensure that whatever shocks happen outside are one-off effects because as I mentioned before the inflation rate not the change in price level but the second and third order consequence that's up to the world central banks if central banks assert that outside changes in the price level uh affect inflation drive a set of inflation outcomes then they're in some ways is admitting something against their own interest. They're saying in some sense that their credibility has been impaired. They're saying that um inflation will happen because they don't have the credibility or trust to stop it. This is why the implicit term, but I would say the most important term in John's rule is credibility. When John wrote that down, the central bank was somewhere near the height of its credibility. In order to achieve that credibility again, the rule can be more operational, more effective, and in so doing, the central bank can respond to shocks of all sorts. Uh, bygones aren't bygones, but they should be lessons learned and as we turn to questions and answers. This is as an appropriate moment as I can think of both to thank John for his contributions, but at least as much call on what John had always called on us 30 years ago to say, "This is a time of inquiry. This is a time of choosing and hopefully that's what we'll accomplish over the course of this day.

[01:17:34]Thank you.

[01:17:38]both. Thank you Kevin for being so disciplined with regard to the time also and linking back to the previous speaker in your remark in your remarks and um so we have you know we take a round of questions we collect questions um right so I see Harold Ulik right there I see two questions there maybe you can bring the microphone okay I was first looking there and then I see Bob Barrow and one person behind and state your name Uh so Harold Ulik uh University of Chicago. So I I heard Kevin say that the large quantity of reserves the regime of ample reserves that we have right now I mean you don't like it. I mean you advocate for much lower reserves because uh you said something to the extent that the reserves that we have out there are inflationary that economic outcomes would be better with much lower reserves and I just wondered about the mechanism that you're thinking of I mean if you think back of uh the zero lower bound phase where the central bank had a lot of reserves on the balance sheet I guess they would have wished for a little bit more inflation it didn't didn't come uh there's also the perspective that Having ample reserves is getting us closer to the Freriedman rule where you know banks uh you know need reserves but they're getting interest on reserves. So why why shouldn't the central bank issue reserves if if interest is paid on that?

[01:19:05]Uh I mean this is an ongoing debate and uh I rarely hear somebody speaking up for having much lower reserves. So I'm wondering whether you could explain the position the question here about Barrow.

[01:19:21]Yeah, I wanted to react to some of Chris's uh remarks. Um I think a principal contribution of my papers with David Gordon was really to explain to the profession what was in the brilliantly uh innovative Kidland and Prescott paper.

[01:19:39]uh we worked out a simple example with the cost of inflation and unemployment and it was completely transparent in that model why there was a benefit from commitment uh and credibility and I think until we did that uh people basically didn't understand what was in kiddland and Prescott and that in fact included us and having worked that out I think that made the kiddland and Prescott paper uh much more important And and of course since that time uh as is justified by its uh innovative nature that has become a major paper in in economics. If you can just pass the mic behind you.

[01:20:23]Thank you. Uh Jason Ferman. This is more for Loretta, but anyone is welcome. Um, the FOMC statements have gotten shorter, but there's some research that suggests that volatility around the press conference, including reversals from the way the market moved on the statement to the press conference has gone up. Um, is that a problem? And if so, does maybe the statement need to go back to being longer, the press conference shorter or some other solution? And then I had a question back there by Bob King. If you and maybe this is going to be right, you can bring him over there.

[01:20:59]And one last question I think uh sorry Pablo and I think we have to wrap it up there and um maybe you can also keep your hand up so they can bring you the mic already and we don't lose time there.

[01:21:13]So, so part of the remarks that I didn't deliver yesterday about John's research program is that he's been fascinated with issues of transition. Uh, beginning with really his first major publication in the JPE on monetary policy during transition episodes. Um, a recent phenomenon for central banks around the world is the idea of these periodic policy reviews. And what I think is that the periodic policy review process kind of sets up a environment in which we're going to have to think about transitions every 5 years and that people in the society are going to have to think about transitions in every five years and I think that that has some bearing for um monetary policy choice.

[01:22:05]So Pablo brief BWS and management. So we've been talking a lot about the monetary policy rules also the word that it's invoking the world it's uncertainty in this period of very high uncertainty should we put more or less weight on these monetary policy rules and uh given this um what are the policy implications for the next few quarters? Thank you. In terms of the replies, maybe let me start with Kevin and Chris who've been more disciplined with their time and then Loretta and Charles. Um, but we have all we have to all four keep it very short.

[01:22:44]Thank you very much, Walker. Um, let me respond to the question over here uh on the size of the Fed balance sheet and QE and reserves. I'll I'll try to do that briefly so I get a gold star at the end of this. Um first the surge in the size of the balance sheet is understandable in periods of great shocks. The Fed was created uh after a panic early in the 20th century to respond to those. So nothing I should say should be taken as as any criticism of what happens in 2008, what happens in the darkest days of 2020. You have to give the benefit of the doubt I think to central bankers in harm's way like that. Point one. Point two, I think it's strange to say in periods of 2008 and 2020 that the balance sheet expansion is monetary policy by other means and not to have any rhetorical or real symmetry on the other end. It can't be monetary policy when the central bank balance sheet is getting bigger, but it's just about bank regulation and reserves in any other circumstance. that kind of asymmetry goes against the very spirit of John Taylor's rules that say maybe you really move to a full policy of discretion. And then finally, I'll just say this. Um when I joined the central bank uh in 2006, we had about an $800 billion balance sheet. If you were to try to scale that to the growth of the economy, the growth of some other things, you'd end up with a 2 and a half or three trillion balance sheet by my guess today. As we sit here, the balance sheets about 7 trillion. Um the right question was raised over here about transitions. The transition from a uh more scarce reserve system where the banks were relying on each other. Most nights the central bank would just come in in periods of extreme illquidity.

[01:24:37]That period morphed then into this excess reserves regime. Going back or adopting a third model will take time.

[01:24:43]It is not something that could or should be done overnight. But I'll only say this. Um the banks will get used to the liquidity regime around it. And if the central bank has a permanently larger role, not just in crisis but in normal times and are in some sense providing liquidity of the banks, not only all seasons and all reasons, but many nights, you fundamentally change the role and responsibility of the central bank and the transition to I what I think is a more prudent system will take time, deliberation, and a excess of comm communication with the public and the banking system. Chris, I'd say there's a I'm going to just make a point that there's the ample reserves and QE kind of get mixed together. Ample reserves is about finding the right level of reserves and trying to keep it there. QE is about changing the growth rate. So take it, let me just take a simple rule, a money growth rule. Say money growth is 3% a year. Okay, great. What's the initial money stock? What's the size of the initial money stock?

[01:25:46]we don't say anything. So that that's kind of the difference between think about the growth rate and the level. You want to think about getting the level of reserves right and that's about making sure there's sufficient liquidity in the system from there. Making it go up or down for policy is a separate statement.

[01:26:01]And we can argue about whether we should or shouldn't do that. But getting an ample reserves so that we don't have to have banks scrambling around every night trying to find reserves or the New York Fed stepping in every day and manipulating how much is in there. that just is inefficient and wasteful as far as I'm concerned. I just want to respond to uh Robert, you know, your paper is the one that got me started on this whole stuff and it was I remember going back when you read the KD and Prescott, it's impenetrable. And in fact, what kid Finn told me was that when they submitted it, the referees were like, I we don't understand this. Can you give us an example of what you're talking about?

[01:26:40]And that was the example at the end of the paper. So what you did was brought a very brilliant insight and made it accessible to the public and I'm one of those people. So thank you Loretta. Yeah. So Jason, my own personal belief is that the statement suffers kind of a hotel California problem because it's so short. Each word in the statement gets a lot of attention and if there's a change in the word, it gets even more attention. And I think that isn't really healthy. The statement is a uh a communication about the committee's views. The press conference is the chair's views. Now, Jay does a very good job of trying to represent the committee discussion, but you can imagine that another chair might not do that. And so, I think it is important for the actual statement to actually say more about what the outlook is, what the risks around the outlook. I think that would be more productive. Um, and I've argued that for a long time and we'll we'll see. But I personally would find it better if the statement, which is the communication from the committee, was a little more transparent.

[01:27:48]And Charles, uh, I'll be brief. I think that I think that I'm going back to this question about the balance sheet. Um my concern um about the balance sheet is is partly about monetary policy, partly about the fact that the Fed has never been able to articulate an integrated approach to how QE and the growth of regime's balance sheet relates to monetary policy. Um but my problem is really more of a political economy problem is that the amber regime amber reserve regime exposes the Fed to abuse of its balance sheet by the fiscal authorities.

[01:28:30]Um I would prefer an operating regime. I would prefer going back to a carter system for example, but I would prefer an operating regime where um the the balance sheet is limited or constrained in some way in its use um and not a free parameter to be used for all sorts of other purposes.

[01:28:54]Um gave me an example just last was it last fall or last fall. She mentioned you know there was some movement in some circles for the Fed to establish an emergency hurricane fund and act as FEMA's funding source and use the Fed's balance sheet to do that. It's a terrible idea. terrible idea because you invite the political process into determining the size and composition of the balance sheet. That in my view is the real danger. Um and that's what I worry about. Thank you. Um so without further delay, we're moving right on to the next panel and a roundup of applause for the great contributions.

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